2014 May Be a Game-Changer for the 340B Drug Discount Program

The year 2014 looks to be a year of major developments for the 340B Drug Discount Program. We have seen (1) a first in terms of the Health Resources and Services Administration (HRSA) imposing sanctions on audited entities, (2) written arguments in a lawsuit over the rules governing 340B access to orphan drugs, and (3) increased funding for HRSA oversight through the recently-passed Omnibus Budget Act. But it is HRSA’s planned publication of regulations in June that may have the greatest impact on 340B Program operations.

Recent Audit Report

In January 2014, HRSA issued its most recent report on its auditing activity. And for the first time, something substantive appears in the column labeled “Sanction.”

As with prior reports, this report indicates that HRSA audited approximately 50 covered entities during the unspecified audit period and identified adverse findings in close to two-thirds of those audits. The most common adverse findings involved either (i) drug diversion, defined as dispensing a 340B drug to a non-patient or in-patient; (ii) duplicate discounts, defined as billing the drug to Medicaid so that the drug was likely invoiced for Medicaid drug rebates; or (iii) database errors in listing of related entities or contract pharmacies.

In the past, the column in the report labeled “sanctions” reflected that for adverse audit findings, sanctions were either pending or to be determined. Now, in about half of the instances with adverse findings involving drug diversion, a sanction of “repayment to manufacturer” is listed on the report. There are no penalty assessments, because HRSA has never issued regulations implementing any authority to impose penalties. For the other adverse findings, including findings regarding duplicate discounts, CMS lists the sanctions as “to be determined.”

Orphan Drug Rule Lawsuit

Last summer, HRSA issued final rules governing 340B access to orphan drugs. As noted in an earlier post, the rules that went into effect in October 2013 were meant to implement provisions of the Affordable Care Act that excluded orphan drugs from 340B pricing. Under the new rules, the orphan drug exception only applies to limited types of 340B covered entities, and only applies if the drug at issue is being used for its orphan-approved purpose — meaning that 340B pricing would be available if the drug at issue was being prescribed for another purpose.

The Pharmaceutical Research and Manufacturers of America (PhRMA) filed a lawsuit to enjoin enforcement of the new rule, arguing in part that HRSA was not authorized to issue rules interpreting the legislatively adopted orphan drug exception. Briefing on that case closed January 17th, with the government, PhRMA, and many interested parties on both sides filing written argument. A ruling is expected in the coming months.

Increased Funding for HRSA

The Omnibus Budget Act, signed by President Obama and funding government activities through September 2014, more than doubled the budget for HRSA’s Office of Pharmacy Affairs from $4.4 million to $10.2 million. This increase is designated for program integrity efforts. Whether those efforts will focus on increased auditing, establishing the long-delayed dispute resolution process, and/or other regulatory efforts, remains to be seen. However, even before finalization of the budget, HRSA appears to have been moving towards issuing long-promised regulations.

HRSA Regulations

In recent years, there has been a constant flow of criticism of 340B Program operations. Drug manufacturers have criticized HRSA for allowing 340B drugs to be used by individuals who have government or private insurance, therefore increasing profits for hospitals and pharmacies. On the other hand, 340B entities have argued that they rely on the promise of proceeds through the 340B Program to expand services to needy populations and argue that manufacturers are needlessly limiting access to 340B drugs and pricing. Congress and the GAO have questioned the dramatic growth in the number 340B covered entities and the use of 340B drugs. A number of critics have focused on HRSA’s lack of regulatory guidance as a contributing factor to the perceived problems.

Covered entities and manufacturers should therefore take note of HRSA’s January 9, 2014 posting on its website:

HRSA is currently working to formalize existing program guidance through regulation, designed to cover a number of aspects of the 340B Program. The regulation under development will address the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, hospital eligibility criteria, and eligibility of off-site facilities. We expect to publish this proposed regulation, which will be open for public comment, by June 2014.

The HRSA notice does not address whether HRSA also intends to give itself authority to impose civil monetary penalties for established violations of its regulations.

Clearly 2014 will be a busy one for companies and entities that do business in the 340B arena. We will continue to monitor and post on developments in the 340B Program.

Theresa Carnegie’s practice involves a variety of transactional, regulatory, and fraud and abuse matters. Her transactional experience focuses on advising health care clients on joint ventures, mergers and acquisitions, service agreements, and corporate stock and asset acquisitions. She has served as corporate and regulatory counsel to retail pharmacy chains, pharmacy benefit managers, and health care providers in acquisitions, which included due diligence, licensing, change of ownership, Medicare and Medicaid state certification, and contracting. She has deep experience preparing and negotiating pharmacy network agreements, pharmaceutical purchase and distribution agreements, and rebate agreements.

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